Thrifty3000

“How about he misread the impact of low interest rates and Fed policy intervention?” - Maybe they just mistimed it by a decade or two. Time will tell. Debt markets are definitely a competency of theirs. They were concerned about unprecedented implications of total debt to GDP ratio, and the Fed being nearly out of ammo with rates at the zero bound. Debt has continued ballooning. The US is all but in a debt trap. There are plenty of reasons to believe markets will be more sensitive to interest rate fluctuations and increasingly volatile. I hope they continue hedging if they find bargain opportunities to do so. “How about he didn't understand the impact of technology on so many industry and sectors.” - He did understand. He was inundated by Blackberries at work, and ended up picking the wrong horse.

I think we are near the edge in terms of the market being overvalued. All the indicators of the s&p 500 are in the all times high (schiller pe, buffet indicator) and that while the real economy is nowhere near to recover. Most of Europe is in a second lockdown of some sort, and even the US now sees steady growth of cases. I feel like the market is way ahead of itself and a lot of people will get burnt in the downturn. Here's a fun site that I think shows what Chuck is talking about: https://www.usdebtclock.org/index.html US Federal Debt to GDP Ratio 1980: 34% US Federal Debt to GDP Ratio now: 128% I think he's saying there's a point of no return on the grand, worldwide, central banking experiment of debt issuance and interest rate manipulation. There's a point where any government, including the US, simply cannot raise more debt to meet financial obligations, and is forced to either cut expenditures, default, or print money/inflate. Nobody knows what that point is for the US. Maybe it's $40 trillion. Maybe it's $100 trillion. But, the point Chuck and Buffett have long made is it makes absolutely no sense to get anywhere close to learning where the limit is on that one. Our government representatives seem to have zero notion of this anymore. They literally think debt can be issued without consequence. What happened to all the hawks?? Buffett recently quipped if governments could actually issue endless debt without consequence, then why did it take governments thousands of years to figure that one out?? Buffett assumes a government able to print its own currency will opt to inflate its way out of trouble. But, that's the killer. Inflation and/or risk of default push interest rates higher. If the US government were to push the debt to $40 trillion, and if inflation/risk pushed interest rates back closer to a long term average around 5%, all of a sudden the interest expense alone is eating up half the government's tax revenue (impossible to pay that kind of interest while also paying for all that social security, Medicare, defense, education, etc). Ergo, more cost cutting, more taxation, more inflation, less productivity, less taxable income, more vicious cycle. Definitely playing with fire on this one. Could be a long headwind to work through.

How much annual earnings does the $1.5 billion buy?

close .. "We closed our acquisition of Allied World on July 6, 2017 and we welcomed Scott Carmilani and Allied World’s 1,430 employees to the Fairfax family. As you know, Allied World is the largest acquisition that we have done and we pursued this acquisition because of Allied World’s outstanding track record over its 15 years of existence and the quality of its management team. We are very thankful to our financing partners OMERS ($1 billion), AIMCO ($0.5 billion) and two others. We issued a total of 5.1 million shares for Allied World. The effect of this acquisition is shown in the table below, which was previously presented to you at our 2017 annual shareholders’ meeting:" "Not shown in the table above is our investment in Eurolife led by Alex Sarrigeorgiou. As you know, Eurolife is one of Greece’s leading life and non-life insurance companies, created by Eurobank in 2000. We bought our share of Eurolife in 2016 for $181 million, with Eurolife being 40% owned by us, 40% by OMERS and 20% by Eurobank. We expect to buy out OMERS within the next two years, so Eurolife will become a Fairfax insurance subsidiary. Eurolife has earned $111 million (our share) since we acquired it, benefitting greatly from a Greek bond portfolio of about A1 billion. The non-life portfolio had a combined ratio less than 70% again in 2017. We are very excited to be partners with Alex and his team at Eurolife as they build a very successful company in Greece." unless i am reading this wrong, Eurolife is pretty insignificant ref: 2018 letter So, you are saying it's more like: 1.) funding subs in hard market ==> Allied, ORH, Brit and Zenith are okay, but over a few years C&F and NB could use perhaps $300m 2.) funding likely January dividend ==> $270m/year for each of 2021-23 = $810m 3.) take out Eurolife partner (OMERS) ==> $181m 5.) take out Allied partners (OMERS) ==> $1B So, it might be ~$2.3B to do all four. If they have EPS=$30/sh, that basically will eat up three years of a conservative Net Income number. SJ Are you factoring in the tidal wave of extra cash/profits that flood in during a legit hard market? Their discipline/ability to ramp up premium volume by 50% (from which claims will be paid out over years/decades) while at least doubling underwriting margins is a big part of the fun of owning BRK or FFH, and doesn't happen that often. For FFH we’re talking at least a couple billion of extra cash for owners overnight (during a legit hard market). Nope, I'm not counting on anything weird or wonderful happening that results in outrageous profitability. About a month or six weeks ago, I tossed out a pro-forma income statement for 2021 in this forum to stimulate discussion. Working from memory, my assumptions were pretty conservative, with ~6% growth in Net Written, a 94 CR and a 2% return on investments. If price increases remain strong, perhaps the CR might be a shade better, but I wouldn't want to get too ambitious about that (historically a 94 CR is already exceptional). The growth in Net Written could definitely be larger (ie double-digits), but again, no need to go too crazy. With my cautious assumptions, I arrived at EPS of $30, but certainly with a bit of underwriting luck, or a couple of good outcomes on the major equity positions it could be considerably higher. The one thing that I would caution you about is to not go to extreme on FFH's ability to increase Net Written. On page 16 and on page 195 of the AR, there are a couple of nice tables which present the premiums to surplus ratio from Dec 31, 2019. There was much variation in this ratio amongst the subs, but NB, C&F and Brit were of particular interest because they were 1.4x, 1.7x and 1.3x respectively. Usually you don't see that ratio go above 2.0 because the regulators demand that companies keep enough reserves to pay indemnities. So, unless capital is added to those three subs, you won't likely see their Net Written increase by 50% any time soon because they just don't have adequate capital to do so. On the other hand, ORH, Allied, and Fairfax Asia could easily increase their premiums by 50%. The other thing to look at is Note 19 on page 95 of the annual report which depicts the dividend capacity of the subs. If you see a sub that can only dividend $100-150m to the parent, it's capital constrained and cannot crank up it's underwriting (because it needs to keep reserves when it writes policies). SJ Hahahahaha. Love it: “ I'm not counting on anything weird or wonderful happening that results in outrageous profitability.” I’m actually with you pretty much 100%. For my personal model I forecast “normal” EPS of $28, and earnings growth barely to modestly outpacing inflation. I recognize the professionals are expecting EPS of $32+, but I can’t allow myself to assume the next couple decades will be much, if any, better than the last decade. (I also assume the really good ol’ days of taking advantage of hard markets have to be dampened by companies like BRK, FFH, and MRK sitting on the sidelines of a maybe $700 billion market with over $100 billion of dry powder. But, I guess it doesn’t hurt that most of the competition is yield-starved.)

close .. "We closed our acquisition of Allied World on July 6, 2017 and we welcomed Scott Carmilani and Allied World’s 1,430 employees to the Fairfax family. As you know, Allied World is the largest acquisition that we have done and we pursued this acquisition because of Allied World’s outstanding track record over its 15 years of existence and the quality of its management team. We are very thankful to our financing partners OMERS ($1 billion), AIMCO ($0.5 billion) and two others. We issued a total of 5.1 million shares for Allied World. The effect of this acquisition is shown in the table below, which was previously presented to you at our 2017 annual shareholders’ meeting:" "Not shown in the table above is our investment in Eurolife led by Alex Sarrigeorgiou. As you know, Eurolife is one of Greece’s leading life and non-life insurance companies, created by Eurobank in 2000. We bought our share of Eurolife in 2016 for $181 million, with Eurolife being 40% owned by us, 40% by OMERS and 20% by Eurobank. We expect to buy out OMERS within the next two years, so Eurolife will become a Fairfax insurance subsidiary. Eurolife has earned $111 million (our share) since we acquired it, benefitting greatly from a Greek bond portfolio of about A1 billion. The non-life portfolio had a combined ratio less than 70% again in 2017. We are very excited to be partners with Alex and his team at Eurolife as they build a very successful company in Greece." unless i am reading this wrong, Eurolife is pretty insignificant ref: 2018 letter So, you are saying it's more like: 1.) funding subs in hard market ==> Allied, ORH, Brit and Zenith are okay, but over a few years C&F and NB could use perhaps $300m 2.) funding likely January dividend ==> $270m/year for each of 2021-23 = $810m 3.) take out Eurolife partner (OMERS) ==> $181m 5.) take out Allied partners (OMERS) ==> $1B So, it might be ~$2.3B to do all four. If they have EPS=$30/sh, that basically will eat up three years of a conservative Net Income number. SJ Are you factoring in the tidal wave of extra cash/profits that flood in during a legit hard market? Their discipline/ability to ramp up premium volume by 50% (from which claims will be paid out over years/decades) while at least doubling underwriting margins is a big part of the fun of owning BRK or FFH, and doesn't happen that often. For FFH we’re talking at least a couple billion of extra cash for owners overnight (during a legit hard market).

jfan, thanks for breaking it down. I think one of the main reasons Helios did a deal with Prem was to boost their brand and get a seat at the "Value Investor Legends Club" table - similar to what Charlie Munger did for Li Liu. I'm assuming much of the appeal of associating with Prem is an ability to at least triple or quadruple AUM over the next few years. To be honest I don't know why they'd give up half their future earnings stream in exchange for a group of somewhat crappy, illiquid, assets, if they didn't think associating with Prem would pretty much guarantee at least $12 billion AUM in 10 years (they could have probably pretty easily grown to $6 billion AUM on their own). I know the payout ratios for future funds will be more favorable for Fairfax Helios. What would the returns look like 10 years out if Helios grows AUM to $10 or $15 billion?

https://www.fairfaxafrica.ca/News/Press-Releases/Press-Release-Details/2020/Fairfax-Africa-Holdings-Corporation-Third-Quarter-Financial-Results/default.aspx

Lets assume deal does not happen, whats the downside at these prices with 100 + 40 mil in cash and zero debt I think you're referencing cash & equivs from the 2019 annual report. Their position is radically different now. During the financial panic earlier this year they basically had to step in as the de facto Federal Reserve for their bank investees. Now their cash & equivs position is down to $68 million of unrestricted cash (and an additional $18 million of restricted cash - locked in bank accounts at investee banks to help them avoid being forced by regulators to raise super-expensive capital). Regarding downside risk of a failed Helios deal I think you have to look at: - liquidation value of the assets after a failed deal - future value of assets in a deteriorating portfolio that has been poorly managed since inception (improperly sized investments in geographies and businesses outside of management's circle of competence) - odds Prem will either liquidate the portfolio and return more cash to shareholders than the current market price, or find new management that can shore up the portfolio and better execute the Africa investment strategy. If the Helios deal fails you might be able to make the case for a liquidation value of as much as, say, $325 million. But, I don't think there's as much margin of safety as you might think. I think the portfolio is basically one negative economic shock - like war or another oil price collapse - away from being impaired to $225 million or less. Also, the portfolio's current manager is not right for the job, but how do you attract a new management team with the requisite talent to manage such a small portfolio? I'm assuming you would need at least a billion dollar portfolio to attract/compensate an effective management team. Further, how would Prem be able to raise a billion dollars to right-size the portfolio given the failed track record? Honestly, I think Prem pretty much HAS to either do the deal with Helios or liquidate ASAP - and both sides know it. I think Prem and Tope are reasonable and will deal fairly with each other. But, I think Prem is in a tough situation. Does he give up majority control (I doubt it, but it might be the best solution)? Does he commit Fairfax to buy/guarantee more of the assets (tough call)? Does he infuse more cash into FAH by issuing more FAH shares - diluting current owners (another tough one)? After all those considerations my opinion is the range of outcomes is too broad for FAH to be a sound investment for a minority equity owner. I think there are plenty of scenarios resulting in permanent loss of capital, thereby making this a value investing anathema. (PS. I'm going to feel REALLY dumb when this deal sails through as it was originally laid out and the stock price jumps 50%. Haha. Oh well.) one of the conditions of closing " As of immediately prior to Closing, the Buyer Entities shall have Cash equal to at least the sum of $102,000,000, including Cash deposits held at any Portfolio Investment of the Buyer, plus the undrawn amount under the Atlas Mara Facility less any Transaction Expenses paid for by any Buyer Entity prior to such calculation of Cash; Hmm. In the Liquidity Risk and Subsequent Events sections of the recent quarterly report that statement is worded a bit differently: "Furthermore, immediately prior to closing of the Transaction, the company must hold at least $102,000 in cash and cash equivalents, restricted cash and marketable securities, less any Transaction expenses." I guess it's not really specific enough to know whether they're falling short on that one. The $40 million Atlas Mara Facility has been fully drawn. No telling if they're able to pay some of it down.

Lets assume deal does not happen, whats the downside at these prices with 100 + 40 mil in cash and zero debt I think you're referencing cash & equivs from the 2019 annual report. Their position is radically different now. During the financial panic earlier this year they basically had to step in as the de facto Federal Reserve for their bank investees. Now their cash & equivs position is down to $68 million of unrestricted cash (and an additional $18 million of restricted cash - locked in bank accounts at investee banks to help them avoid being forced by regulators to raise super-expensive capital). Regarding downside risk of a failed Helios deal I think you have to look at: - liquidation value of the assets after a failed deal - future value of assets in a deteriorating portfolio that has been poorly managed since inception (improperly sized investments in geographies and businesses outside of management's circle of competence) - odds Prem will either liquidate the portfolio and return more cash to shareholders than the current market price, or find new management that can shore up the portfolio and better execute the Africa investment strategy. If the Helios deal fails you might be able to make the case for a liquidation value of as much as, say, $325 million. But, I don't think there's as much margin of safety as you might think. I think the portfolio is basically one negative economic shock - like war or another oil price collapse - away from being impaired to $225 million or less. Also, the portfolio's current manager is not right for the job, but how do you attract a new management team with the requisite talent to manage such a small portfolio? I'm assuming you would need at least a billion dollar portfolio to attract/compensate an effective management team. Further, how would Prem be able to raise a billion dollars to right-size the portfolio given the failed track record? Honestly, I think Prem pretty much HAS to either do the deal with Helios or liquidate ASAP - and both sides know it. I think Prem and Tope are reasonable and will deal fairly with each other. But, I think Prem is in a tough situation. Does he give up majority control (I doubt it, but it might be the best solution)? Does he commit Fairfax to buy/guarantee more of the assets (tough call)? Does he infuse more cash into FAH by issuing more FAH shares - diluting current owners (another tough one)? After all those considerations my opinion is the range of outcomes is too broad for FAH to be a sound investment for a minority equity owner. I think there are plenty of scenarios resulting in permanent loss of capital, thereby making this a value investing anathema. (PS. I'm going to feel REALLY dumb when this deal sails through as it was originally laid out and the stock price jumps 50%. Haha. Oh well.)

Just for kicks I reached out to an M&A investment banker to hear his thoughts. He said over the course of a quarter if negative developments cause a revaluation of 10% the deal is virtually guaranteed to get renegotiated (or dissolve). He said pulling the webinar from the website is super shady - a giant red flag. Posting the webinar signaled the deal was progressing. However, removing the webinar is almost a sure sign that Helios contacted FAH and said we no longer have a deal. He said the standard M&A playbook for a negative development would be for Helios to jockey for a significant downward revision of FAH's valuation (maybe from $400 million to $300 million) to provide a margin of safety in the event of further negative surprises. Obviously that would throw a huge wrench in Prem's desire to maintain control. If a CIG bankruptcy will destroy $15 million of value, then there only needs to be $20 million or so worth of additional negative developments this quarter to spook Helios. Considering AGH and GroCapital experienced declining valuations totaling $13 million last quarter, I don't think it's farfetched to think we might see similar declines in those or other assets this quarter.

I went ahead and dug into the CIG-related investments as of the last quarterly report, just to try to ring fence the bankruptcy-related risk: - CIG stock = $6 million - CIG loan = $15.5 million - PGR2 loan = $18.5 million Total = $40 million Bankruptcy scenario: - CIG stock = $0 - CIG loan appears to be secured against CIG assets, so I'm completely guessing there might be a 30% recovery: $5 million - PGR2 - some good news here is that even though it's collateralized against CIG equity, the loan was to Peregrine so Peregrine could buy CIG shares during the rights offering. It accrues 15% interest annually for FAH, and has to be repaid by Peregrine in 2021 (Peregrine was recently acquired and appears healthy/solvent): $20 million Total value after bankruptcy: $25 million So, it looks like the financial risk in the event of a CIG bankruptcy is maybe $15 million. I wouldn't think that amount on it's own would derail the deal with Helios. I think CIG is only a deal-breaking risk if Helios is concerned about the reputational risk/optics, distraction, and general headache of overseeing a bankruptcy proceeding immediately after a merger. But, like Petec said, that's purely speculation.

Darn, still no CIG results or circular. Clock is ticking, and time kills deals. I found a headline from 2 weeks ago (Oct. 1) announcing changes to CIG's board of directors and sub-committees. But, I can't access the article's content, and I can't find an official release from CIG. But, it may lend support to SD's theory that the CIG board is the hold up. The CIG board certainly understands the deal disrupting consequences of tardiness and discord. Bad form.

One other key consideration... Much of the value of this deal for Helios is for future publicity and marketing. In fact, the success of Helios's private equity efforts long term will be directly tied to the success of Fairfax Africa. In the future, any prospective Helios PE investor will have complete visibility into the publicly available Fairfax Africa investment performance. If this deal creates negative press for Helios (like having 25% or more of book value evaporate within a year or two of doing the deal) then it will become a vicious cycle for Helios and Fairfax Africa. A massive blunder like that could set Helios back by a decade.

https://www.forbes.com/sites/simonmoore/2019/01/30/the-hidden-signal-in-delayed-earnings-announcements/#246097ad5750 The article explains that significantly delayed earnings are statistically a legit red flag. We already know Consolidated Infrastructure Group (CIG) is teetering on the brink of bankruptcy. Consolidated Infrastructure Group was already having to include a section in their reports explaining why the board believes the company can actually be considered a going concern - despite being all but bankrupt (I mean they're literally at the over-drafting their bank accounts level of bankrupt). Management claims that the problems are confined to their largest division, and that the other divisions can stand on their own. They use the health of the company's other divisions as justification for going concern. They say they can draw from the other divisions to cover costs of restructuring and right-sizing the problem division. I'm not so sure though. Someone should look into this, but I think they have a ton of short term liabilities guaranteed at the corporate level. I don't think the liabilities are isolated among the divisions. I think if the company defaults it will be a difficult restructuring. I have a hunch Fairfax Africa's CIG loan is subordinate to all the rest of the debt. CIG's value has plummeted from somewhere north of $500 million to less than $5 million in less than 4 years. It's a rotten company, and it's tied to some industries/geographies that are getting stomped on in Africa. We all know Prem is a master of smoothing things over during acquisition talks. However, poor earnings surprises is one of the primary reasons deals fall apart. And, I think it's possible Helios is watching CIG implode and realizing they are very likely going to have to oversee an ugly bankruptcy proceeding, AND they are going to have to write off the CIG loan (and maybe the PRG2 loan - I don't know what the loan was for, I just know it's collateralized with CIG equity, ouch). I assume the Helios deal was struck on the assumption each party is contributing around $400 million worth of value. Depending on CIG's performance in the 3rd quarter - when combined with other issues in the portfolio - it probably isn't hard to make a case that $100 million of Fairfax Africa's book value is at risk (that's not including ATMA equity or the ATMA Facility). But, here's the other psychological wrench. Helios almost certainly believes they are bringing at least $400 million of value to the table. They have the luxury of basing their value on future projections. By now the realization has sunk in that they are on the cusp of selling MAJORITY CONTROL of their $3 BILLION DOLLAR BABY to Prem Watsa's HEIRS. They are watching the Fairfax Africa dumpster fire burn and asking why they are exchanging CONTROL of their own lives (yes, control, for the next 30+ years they will have to convene the board and ask Prem Watsa's children for permission to invest in any insurance operation, or to make any investment over $50 million), all in exchange for a DUMPSTER FIRE that they fully believe is worth less than what they are bringing to the table. (At the very least they should be jockeying for majority control right now.) I know there's strong psychological bias not to re-trade a deal, etc. But, I think CIG is a deal breaker, and I have a hunch we're watching it play out in the form of: - delayed CIG report - delayed circular - deleted webinar access If the deal goes through I believe the stock is instantly worth 50% more. Easily! Which is why it's so hard to sit on the sidelines knowing it could bounce anytime now (on positive CIG news or more signs of deal confirmation). But, right now, given the red flags, I personally think the odds of the deal succeeding have tipped below 50% in recent days (I hope I'm wrong). And, without the deal going through I don't have high confidence Fairfax Africa's current leadership will right the ship.

Why’s 2099 shares a day the magic number? Are they limited (as the issuer would be for an NCIB)? That's probably the amount of daily volume they can purchase without overly impacting the price. So they're investing around $7,000 daily.

Good luck. I’ve sent emails to Atlas Mara’s investor relations in recent months. No response. I HATE when publicly traded companies with highly paid Chief Financial Officers miss reporting deadlines (for anything other than technical complications or reasons that can be easily explained in a press release). It’s your F-ing job to report financials to your OWNERS on time. And, EVERYTHING these days is digital - so it ain’t hard! There’s no good excuse. If they’re waiting on a well-worded chairman’s letter from an overcommitted chairman, then shame on them (they can release financials and announce a letter is forthcoming). If they’re trying to figure out how to “legally” window-dress receivables they’ll never collect in a million years then shame on them. If they’re trying to delay reporting until after the ink is dry on a Helios deal then shame on them (that’s neither fair nor friendly) - and if Helios actually falls for that, then shame on anyone who trusts Helios’s judgment. Reporting abnormally late is not a small issue! In my book the only things worse than disrespecting owners via unexplained reporting delays are major lawsuits and abrupt CEO/CFO resignations. I try to be the first to the exit in those situations. 2 out of 3 times it’s the right decision.

Thrifty3000 where do you see that. i have been desperately searching for that. i can only see the event date on Sept 16 It WAS on their website last week on the Events and Webinars page. I found it on Thursday afternoon. The next morning it was gone! There was no messaging saying how long it would be made available.

I'm sensing some weird vibes on this deal. 1) The circular still hasn't been published. 2) Atlas Mara was late posting interim results due in September, and when they did post, their tangible book value had dropped from $2.84 per share a year ago to $2.05 now (that's a pretty big hit - thanks mostly to currency devaluation). And, I have a hunch the meltdown could be seen as a material risk by Helios, because even after Fairfax buys ATMA and guarantees the $40 million facility, Fairfax Africa will still hold something like $40 million of ATMA bonds, which are collateralized with an African country's government bonds and a bank subsidiary's equity (woohoo). I also don't think ATMA can afford to pay the interest yet. (#redflag) 3) CIG is also late posting interim results. They were also due in September, and CIG issued a press release announcing they would be late. Last I checked CIG's market cap was in the neighborhood of $0. Fairfax Africa holds about $40 million of CIG loans, which like ATMA, CIG is failing to pay interest on. (#redflag) 4) Last week I noticed Fairfax Africa posted a link on the Events & Webinars page to a replay of their webinar with Helios. I watched the webinar, and had the following impressions: - Helios's Tope Lawani is super impressive. He presents himself very well and communicates like an executive capable of managing billions of dollars. - In contrast, Fairfax's Michael Wilkerson seemed out of control. He nonchalantly admitted the ATMA investment was inappropriately over-sized for the portfolio (and didn't strongly defend the investment thesis - a pet peeve of mine). I felt/detected he was deferring to Prem or hesitating with answers to questions about decisions made on his watch. And, I couldn't help but be distracted by Michael's disheveled office and ill-fitting attire - especially for a guy that needs to instill confidence/control to get a vitally important deal across the finish line. (#redflags) After watching the webinar my first thought was, wow, Prem seriously nailed it with Helios - I can't wait to see what they bring to the table. But, my next thought was, why would Helios accept minority ownership of their life's work if in exchange they're being offered an illiquid dumpster fire? (I decided to sleep on it.) NOW, here's the kicker... I returned to the Fairfax Africa website the next morning to grab the webinar link and post it on this forum. BUT, the link was removed! Since the purpose of the webinar was to assure investors of the deal's merits, the sudden removal of the webinar before posting the circular seemed odd. (#redflag) I have to say, a late financial report by ATMA, no financial report from CIG, a late circular, a leader with an ungodly amount of responsibility appearing in over his head, and the deleted webinar has sufficiently shaken my confidence on this one. I had a small cigar butt position that I exited over the last 2 days at a whopping 6% annualized pre-tax gain. At this point I'll either wait for the deal to collapse to see if it presents another cigar butt opportunity, or wait for the ink to dry, and see if it can be purchased at a decent valuation based on the circular. Or, I'll throw it where it actually belongs, in the way too hard pile. Hopefully that circular is published and the deal finalized asap.

Here we go. Atlas Mara announced yesterday they sold a subsidiary bank for .8 times book value: https://otp.tools.investis.com/clients/uk/atlas_mara1/rns/regulatory-story.aspx?cid=744&newsid=1419246

Thanks, Petec! After reading your notes and what I’ve found about Helios on the internet this seems like an ideal pivot for the African strategy. Helios seems like it’s about as high quality of a partnership as you could hope to find in Africa. I liked the color on the currency and fx risk management. I’m looking forward to the circular.

Was anything interesting shared at the meeting today? https://www.fairfaxafrica.ca/News/Press-Releases/Press-Release-Details/2020/Fairfax-Africa-to-Provide-Update-on-Strategic-Transaction/default.aspx

I've read Prem's letters and listened to him speak for years. I think he's a good man. I think he's a great promoter. I never feel like he's trying to mislead me. I always feel like he's trying to sell me, on Fairfax. Good for him. That's what I want from a CEO. Prem is a human billionaire. He will have good days and bad days. In the public eye he will have good performances and bad performances. He will experience a range of good and bad fortune. You can easily selectively build a case for or against a man like Prem. It's why we have to look at the data over time - at the per share earnings potential against the price per share. If you think Prem belongs anywhere near the same camp as someone like Biglari then by all means exit and don't look back - at least until he's no longer in control. As investors it's our job to evaluate the prospects of the business. A decade ago Prem was regarded as super-human, and the company was selling for something like 30 times its near-term earnings potential. That's Mr. Market's fault, not Prem's. (It was probably a good time to trim one's position and become an observer. I think plenty of investors did.) No matter how you slice it the earnings power of the business grew over the last 10 years. Now the company is a going concern selling for what could easily be less than 10 times its near-term earnings potential. So, the value has increased while the price has plummeted. I'm not sure that's the kind of scenario I'd advise others to "move on" from.

perhaps neither ABX nor FAH, lets go with Jumia with a $600 million market cap. :-) Fire and forget. See you in 2030. i am not as knowledgeable as everybody else when it comes to FAH, but here some broad strokes from an average joe who has been watching the collapse of Fairfax Africa in slow motion; and lets call it what it is, a collapse: - FFH with all its deep bench, simply didn't not have the needed overhead to support such a far flung operation. There is no shame into that. A lot of companies stay away from what they do not know. When was the last time, you saw a job opening on FFH looking for local talent in Africa to feed its investment vehicle. - it is fine that FAH is permanent capital, therefore not exposed to the same pull as say PE would be when client start to pull in their money, before the investment plays out. But even permanent capital is not immune, when it is trading on the market as an investment vehicle and the message that it sends when the stock takes a massive hit. What was wrong planting these seeds in Africa as part of FFH (and I believe in Africa), rather a separate permanent capital vehicle. - there was no reason for FFH to create FAH and FIH at the same time when it did. I understand FIH, given their historic exposure in India. They could have kept FAH within FFH for a while longer. - i have said this in the FIH thread, the FIH/FAH needed to have some management fee stream that gives their respective management ammunition to deploy. in absence of that the only other two source of cash is either selling a crown jewel at the wrong time or issuing stock at the wrong time. i think issuing debt without having a cash inflow to pay the interest not feasible either. FWIW, I think FAH was earning maybe $20 million of interest annually. Though, I think much of it was paid in kind (or rolled into additional principle) in recent months. FAH had over $100 million of bonds, loans, and guarantees. Most earning double digit interest rates. (Much of the interest coming from ATMA.) I get the sense FFH’s buying back ATMA was a deal concession. I look at it as a $40 to $80 million dollar pot sweetener. Neither FFH nor Helios needed any more risky financials on their books - they both have plenty. And, you know ATMA is risky because Wilkerson is the chairman of ATMA’s board. Wilkerson has COMPLETE visibility into ATMA. I’m talking daily updates on loan losses/forbearance. If ATMA was a guaranteed success Wilkerson could have convinced Helios to take it. But, he didn’t, which means ATMA is a big question mark. I guarantee there are tons of bad debts piling up. And, the prognosis goes something like this... if energy demand, travel, and life in general return to normal in the next 6 to 12 months then ATMA will probably work out ok, but if it doesn’t then we’re probably impairing this sucker big time. Remember, ATMA was already a red flag when it asked to defer interest payments back in December - even before Covid emerged as a threat. No doubt FAH’s Wilkerson has plenty of IQ. A Harvard MBA and a masters from Yale is ample evidence. I have a hunch his experience with CIG and ATMA will propel him to world-class turnaround expert status. And, I’m sure he is experiencing a lifetime’s worth of stress these days. But, concentrating $500+ million into a falling knife bank holding company, a horrendously mismanaged infrastructure company, a startup education company, and a couple AGH spin offs was a terrible rookie mistake - fueled by impatience, lack of discipline, and unawareness of one’s circle of competence. (The blame can be shared by Wilkerson, FFH’s investment team, and FAH’s board.) The whole fiasco was a hope strategy that didn’t work out. From what I’ve gathered in a few hours of digging, Helios is much more in line with the type of investment manager you would expect of a partnership with a reputable billionaire like Prem. Being the largest, fastest growing, savviest Private Equity group in Africa comes with plenty of competitive advantages. (I’m intrigued by the little I’ve learned so far about their growth, telecom business, and dollar denominated credit operation.) My gut says Helios got wind that Prem was looking for a new investment manager for FAH. I suspect Helios has plenty of investment opportunities that could thrive with more access to dollar bills. I suspect Helios was aware of FAH’s large cash position, and skillfully and compellingly made Prem aware of what Helios could do with a couple hundred million of extra US dollars (remember, Africa does not have access to the Federal Reserve’s dollar swap lines. There has been a run on dollars, and African business is a fish out of water without dollars.) I suspect Helios said to Prem something along the lines of “if you not only give us control of FAH’s $140 million of cash & equivs, but also kick in an extra $40 mil while taking ATMA’s risk off the table, we already have the breadth of opportunities and knowledge (aka more ideas than capital) to immediately deploy US dollars so incredibly profitably that investing in Africa during its 40% off sale will feel even easier than investing in US equities in the 1970’s.” Prem says “where do I sign the check?” I do not know if you were on the call for AGM 2020 and heard Prem and Michael's comments when they were asked point blank if there is any stress in any of the businesses including ATMA or CIG...their response was basically that their internal tests indicated that businesses will be able to manage on their own apart from the 40mil to ATMA . Prem called the share price at 3$ an absolute joke . They basically cannot sell at ATMA for 40 mil to a related party without marketing the business independently to the market. UBN stake alone could have easily fetched 80-100mil . I hear what you're saying on ATMA. I think if the ATMA transaction was done in isolation (not as part of a broader deal with Helios), without additional explanation, it would raise red flags - and maybe even spark some legal activity. But, it's clearly a deal concession. Fairfax and Helios both well know the importance of speed when it comes to doing deals. I suspect that during the diligence process Helios couldn't pinpoint the value of ATMA (especially with recent devaluations, and with so much of the equity stakes collateralizing debt). Helios probably considered selling it post-transaction, and realized it could be a nightmare, especially since the recent deal had collapsed. I have a hunch Helios had conversations with the parties involved in the prior deal that fell through (I feel like Fairfax would allow those types of discussions), and probably with other potential buyers, none of which alleviated concerns related to ATMA. My guess is Helios raised ATMA as a deal breaker. Fairfax wanted to salvage the deal, had to think quickly, probably considered multiple solutions, and proposed taking most of the ATMA risk off the balance sheet by buying it at ATMA's public market value. There were alternative solutions; - Fairfax could have offered to infuse more cash by buying more shares of FAH at around $3.00 per share - they could have offered to loan FAH money - they could have offered Helios more equity in the deal, etc. I think Fairfax recognized the value of a partnership with Helios, knew they needed a quick solution specific to ATMA, and probably did the right thing to salvage the deal. I think this deal de-risks FAH big time. I think it's win win for Fairfax and Helios. I think Helios will leverage this relationship to launch a few $3 to $5 billion funds over the next decade, which will gush cash into the new FAH (Helios Fairfax Partners - HFP). I think HFP will provide a lot of visibility into how Helios performs, which will be reviewed by potential investors in their PE deals, so Helios will have plenty of incentive to assure HFP performs very well. Assuming Helios can continue drumming up value in Africa for years to come this deal should create a virtuous cycle for HFP owners and for Helios's partners. If it turns out Helios is more skilled at raising funds than investing profitably, then at some point HFP will languish. If that happens Fairfax still has control. So, at the current price, over the next decade, I see this as landing somewhere between an investment that languishes (but, doesn't go to zero unless we see crazy leverage introduced), and maaaaybe a 10 bagger if Helios rides a wave of strong African economic growth, strong investment performance, and strong fund raising.

perhaps neither ABX nor FAH, lets go with Jumia with a $600 million market cap. :-) Fire and forget. See you in 2030. i am not as knowledgeable as everybody else when it comes to FAH, but here some broad strokes from an average joe who has been watching the collapse of Fairfax Africa in slow motion; and lets call it what it is, a collapse: - FFH with all its deep bench, simply didn't not have the needed overhead to support such a far flung operation. There is no shame into that. A lot of companies stay away from what they do not know. When was the last time, you saw a job opening on FFH looking for local talent in Africa to feed its investment vehicle. - it is fine that FAH is permanent capital, therefore not exposed to the same pull as say PE would be when client start to pull in their money, before the investment plays out. But even permanent capital is not immune, when it is trading on the market as an investment vehicle and the message that it sends when the stock takes a massive hit. What was wrong planting these seeds in Africa as part of FFH (and I believe in Africa), rather a separate permanent capital vehicle. - there was no reason for FFH to create FAH and FIH at the same time when it did. I understand FIH, given their historic exposure in India. They could have kept FAH within FFH for a while longer. - i have said this in the FIH thread, the FIH/FAH needed to have some management fee stream that gives their respective management ammunition to deploy. in absence of that the only other two source of cash is either selling a crown jewel at the wrong time or issuing stock at the wrong time. i think issuing debt without having a cash inflow to pay the interest not feasible either. FWIW, I think FAH was earning maybe $20 million of interest annually. Though, I think much of it was paid in kind (or rolled into additional principle) in recent months. FAH had over $100 million of bonds, loans, and guarantees. Most earning double digit interest rates. (Much of the interest coming from ATMA.) I get the sense FFH’s buying back ATMA was a deal concession. I look at it as a $40 to $80 million dollar pot sweetener. Neither FFH nor Helios needed any more risky financials on their books - they both have plenty. And, you know ATMA is risky because Wilkerson is the chairman of ATMA’s board. Wilkerson has COMPLETE visibility into ATMA. I’m talking daily updates on loan losses/forbearance. If ATMA was a guaranteed success Wilkerson could have convinced Helios to take it. But, he didn’t, which means ATMA is a big question mark. I guarantee there are tons of bad debts piling up. And, the prognosis goes something like this... if energy demand, travel, and life in general return to normal in the next 6 to 12 months then ATMA will probably work out ok, but if it doesn’t then we’re probably impairing this sucker big time. Remember, ATMA was already a red flag when it asked to defer interest payments back in December - even before Covid emerged as a threat. No doubt FAH’s Wilkerson has plenty of IQ. A Harvard MBA and a masters from Yale is ample evidence. I have a hunch his experience with CIG and ATMA will propel him to world-class turnaround expert status. And, I’m sure he is experiencing a lifetime’s worth of stress these days. But, concentrating $500+ million into a falling knife bank holding company, a horrendously mismanaged infrastructure company, a startup education company, and a couple AGH spin offs was a terrible rookie mistake - fueled by impatience, lack of discipline, and unawareness of one’s circle of competence. (The blame can be shared by Wilkerson, FFH’s investment team, and FAH’s board.) The whole fiasco was a hope strategy that didn’t work out. From what I’ve gathered in a few hours of digging, Helios is much more in line with the type of investment manager you would expect of a partnership with a reputable billionaire like Prem. Being the largest, fastest growing, savviest Private Equity group in Africa comes with plenty of competitive advantages. (I’m intrigued by the little I’ve learned so far about their growth, telecom business, and dollar denominated credit operation.) My gut says Helios got wind that Prem was looking for a new investment manager for FAH. I suspect Helios has plenty of investment opportunities that could thrive with more access to dollar bills. I suspect Helios was aware of FAH’s large cash position, and skillfully and compellingly made Prem aware of what Helios could do with a couple hundred million of extra US dollars (remember, Africa does not have access to the Federal Reserve’s dollar swap lines. There has been a run on dollars, and African business is a fish out of water without dollars.) I suspect Helios said to Prem something along the lines of “if you not only give us control of FAH’s $140 million of cash & equivs, but also kick in an extra $40 mil while taking ATMA’s risk off the table, we already have the breadth of opportunities and knowledge (aka more ideas than capital) to immediately deploy US dollars so incredibly profitably that investing in Africa during its 40% off sale will feel even easier than investing in US equities in the 1970’s.” Prem says “where do I sign the check?”

It doesn't look like Helios is paying anything up front. In exchange for the 46% stake Helios is committing a percentage of all future fees from its private equity funds. I haven't found any info on Helios's historical fee earnings yet. Helios manages around $3.6 billion. For now I'm assuming the deal is structured where Helios will start out contributing maybe $15 to $25 million annually. I also assume they will continue increasing their assets under management, which should generate additional fee revenue going forward. Helios will benefit from having a liquid, publicly traded, investment vehicle backed by the credibility and network that comes with Fairfax. FAH will benefit from being managed by leading, proven, investors in Africa. what does not seem right is selling ATMA for 40mil to Fairfax when Fairfax africa themselves have calculated the tangible book value around 280 mil and were selling business in 4 countries to Equity group for 105mil + u have UBN and Botswana... If helios contribute 20mil in earnings and u put multiple of 10 to that ..it implies that FAH is valued at 400mil right now? I somehow doubt helios will contribute in excess of 10 mil right now but then there is no way to be sure until we see more data...they should have released these numbers alongwith press release I 100% agree there should have been more information. At the very least there should have been some historical information about Helios’s fees. I’m sure all the major shareholders, like Omers, are aware of this information. But, my first impression when reading the press release was “wow, this announcement shows zero regard/respect for minority equity holders.” My assumption is Prem would not appreciate being treated the way this announcement treated smaller shareholders if roles were reversed. My guess is he believes the smart money has already bailed. I also think this is a pretty good/brilliant solution to what everyone knows was a serious eff-up. And they probably expect the smart money to recognize the solution’s “brilliance.” At this point the worst case is along the lines of what SharperD has been warning about... that equity investors simply cannot outrun currency devaluation, corruption, and poor business performance in Africa. If so, this deal only prolongs the slow, painful, death. On the other hand, we could be looking at a scenario where a decade from now: - $450 million of existing assets doubles in value to $900 million - Helios contributes $400 million of fees, which is invested and grows to a total value of, say, 600 million - Helios increases their PE assets under management from $3.6 billion to, say, $10 to $12 billion, which will contribute $80 or $100 million of annual fee income to FAH. If you slap an 18 multiple on that and add it to the prior two items you get a fair value over $3 billion, and a 5 to 10 bagger from today’s price. I have a hunch the optimistic scenario is where Prem is leaning, and probably thinks no further explanation is needed. With that said, without more color on expected fees this is highly speculative. at 3$ per share the market cap is around 180mil out of which 140 is cash( minus 40 mil they lent to ATMA which Fairfax is now guaranteeing) . Even after this deal the fair value is probably around 5.50 assuming no new impact on investmetns from COVID-19 since Mar 31. What really bothers me is the sale of ATMA for 40mil when UBN stake alone is worth north of 100mil and UBN itself is on much firmer footing now than a couple of years ago. This is likely going to open up FAH mgmt to potential litigation if there is isn't more to the deal. As it is it seems like Fairfax Financial is trying to make up for its loss in FAH by getting ATMA for pennies. I suspect Helios needs/wants US dollars. And, I think ATMA was probably too risky for Helios. Helios already has a focus on financials, so they probably didn’t want any more in the portfolio. UBN is in Nigeria. Nigeria is extremely oil dependent. It costs $23 per barrel to extract oil in Nigeria. There’s much cheaper oil in nearby regions (aka Middle East). So, with reduced global demand Nigeria isn’t exporting as much, which means their US dollar supply is running low. They already had to devalue their currency once to slow the USD depletion. And, when they did it hit the value of UBN hard. Also, approx 30% of UBN loans are to the oil & gas industry. Additionally, ATMA’s other major bank is in Botswana, which is heavily dependent on the travel and leisure industry. Ouch. Another one of their banks is in a hyperinflation country. And, they’re still stuck holding the non-strategic banks, which aren’t profitable. So, there’s plenty of pain at ATMA. Between the loan losses, currency devaluation, and interest rate fluctuations, it’s next to impossible to forecast what will remain of ATMA post Covid.